Research Archives

The Market Outlook for the Week Ahead, or The Election is Here!

That was a great lead into Halloween last week, where frightening share price movements scared the living daylights out of all of us. The Dow Average dove by 7.0% last week and is down 8.9% from the September 1 peak. It was the worst performance in seven months.

Of course, I saw it all coming a mile off, predicting a selloff going into the November 3 presidential election and a rally once the great uncertainty is removed. That’s why I have run several short positions over the past month, all of which proved successful, and am long flipping to the long side.

The next generational peak at 120,000 is now only 93,499 points away. Time to get moving.

Of course, technical analysts who were eternally bullish at the market top are now wringing their hands over the double top on the charts that even a two-year-old can spot. It’s only giving us a better entry point for longs that will carry us through to yearend.

The stock market has priced in a contested election. If that doesn’t happen, and the winning candidate takes the White House by a landslide, markets will have to immediately back out that dire scenario. Stocks could soar by 1,000 points immediately on the first whiff of a challenge0-proof victory margin.

This time, we have the luxury of trading against a line in the sand at a (SPY) of $310, the 200-day moving average. Look at the chart below and you’ll see that this was not only close to the highs in 2018 and 2019 and a recent bottom in 2020. As if driven by the force of gravity, the market seems strangely driven to the $310 level.

It’s almost impossible to lose money on call spreads bought at market bottoms when the Volatility Index (VIX) is over 40%, as it was on Thursday and Friday. It’s time to strike while the iron is hot, and other investors are jumping off of bridges.

I’ll be piling into domestic recovery stocks like banks, construction, couriers, railroads, and gold and selling short bonds and the US dollar.

The election has already taken place, as 85 million votes have been cast in early voting. Many states have already seen double their 2016 turnouts. We just don’t know the outcome yet. It’s likely that new Covid-19 infections could top 100,000 on election day.

I’ll be up all night on Tuesday watching the results come in and keeping a hawk-eye on the overnight futures trading in Asia, the only open markets. Watch for Florida and North Carolina to report first.

One of the great ironies of trading last week was that after delivering the best earnings performance in stock market history, we saw one of the worst share price performances.

That’s because all of the great stimulants for the economy in recent months, the prospect of a massive stimulus package, declining Covid-19 cases, and plunging interest rates, will take a three-month vacation while the United States changes governments.

We really do work in a “what have you done for me lately” industry.

It was all about tech earnings last week, with Amazon (AMZN), Alphabet (GOOGL), and Microsoft all reporting. We have to wait until next week for Apple (AAPL). They all knocked the cover off the ball. Only Apple (AAPL) disappointed on a 20% YOY sales drop.

It seems everyone was waiting for the iPhone 12. Stock was off $10. Sales in China also took a big hit. Expect a massive resurgence in Q4. iPhones are selling faster than Apple can make them. Buy (AAPL) on dips. The stock jumps 8%. Forget about the DOJ antitrust suit. Buy (GOOGL) on dips.

Crashing bond prices show that a recovery is imminent, with ten-year US Treasury yields ($TNX) jumping 20 basis points in a month to a four-month high. Buy (SPY) on dips and sell short (TLT) on rallies.

Existing Home Sales soared by 9.4% in September, up a staggering 20% YOY. Inventories fell to a record low 2.7 months. Median prices are up an astounding 14.8% YOY to $311,800. Zillow believes this madness will continue for at least another year. Sales were strongest in the Northeast, with most of the action in single-family homes. Homes over $1 million have doubled, and vacation homes are up 35%.

Q3 GDP exploded with a 33.1% rate, double the highest on record and in line with expectations. All cylinders are firing, except for the 20% of the economy that went bankrupt during the pandemic. The stock market fully discounted this on September 1 when stocks peaked. The US won’t recover its 2019 GDP until 2023. With Corona cases now soaring, are we about to go back into the penalty box?

Weekly Jobless Claims posted at 751,000, an improvement, but still near a record high. It’s the lowest report since pre-pandemic March 14. I think a lot of these losses are structural….and permanent.

The World’s Biggest ETF is bleeding funds, with the (SPY) losing $33 billion this year. Massive selling at market tops has been a major factor. Most of the selling was in February and March when the pandemic started, and the money never came back. It also belies the widespread shift into tech stocks this year. Out with the boring, in with the exciting. Dry powder for the coming Roaring Twenties?

When we come out the other side of the pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Global Trading Dispatch hit another new all-time high last week. October closed out at a moderate 1.51% profit.

I took a big hit on a long in Visa (V), thanks to a surprise prosecution from the Department of Justice over their Plaid merger. I more than offset that with short positions in the (SPY) and (JPM). Then on Friday, I leaned into the close, picking up new longs in the (SPY), (TSLA), and (CAT) betting on a post-election rally.

That keeps our 2020 year-to-date performance at a blistering +36.03%, versus a LOSS of -7.5% for the Dow Average. That takes my 11-year average annualized performance back to +35.90%. My 11-year total return stood at a new all-time high at +391.94%. My trailing one-year return appreciated to +42.48%.

The coming week will be one of the most exciting in history as election results trickly out Tuesday night. As if we didn’t have enough to worry about, it is also jobs week. We also need to keep an eye on the number of US Coronavirus cases and deaths, now over 9 million and 232,000, which you can find here.

On Monday, November 2 at 8:00 PM EST, US Vehicle Sales for October are released. Alibaba (BABA) and Sanofi (SNY) report earnings.

On Tuesday, November 3, we get the US Presidential Election. Early results in Florida will start coming out at 7:30 PM EST. TV networks, makers of campaign tchotchke and bumper stickers, and talking heads will go into mourning. Coca-Cola (K) reports earnings.

On Wednesday, November 4 at 9:15 AM EST, the ADP Private Employment Report is out. QUALCOMM (QCOM) and Wynn Resorts (WYNN) report earnings.

On Thursday, November 5 at 8:30 AM EST, the Weekly Jobless Claims are announced.

On Friday, November 6 at 8:30 AM EST, the October Nonfarm Payroll Report is announced. Barrick Gold (GOLD) reports earnings. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I went to San Francisco for dinner with an old friend last night and I couldn’t believe what I saw. Storefronts were boarded up, the streets vacant, with only the homeless ever present. The cable cars have quit running.

We ate outside at my favorite Italian restaurant Perbacco on Market Street where the heat lamp blasted away. The restaurant is owned by my transplanted Venetian friend Umberto Gibin. He was running it at 50% capacity with 25% of the staff just to break even.

I hope he makes it.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

With Pieces of a Zero Fighter in Guadalcanal

November 2, 2020/by Mad Hedge Fund Trader

October 28 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the October 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think if Trump contests the election, it will be bad for stocks?

A: Yes, count on that knocking another 10% off of stocks. The market has spent the last six months pricing in a Biden win. Take that away and you have to price that back out again, about 6,000 Dow Average points (INDU). We’ve already dropped 2,500 points so that leaves another 3,500 points of downside t0 go in the event of a Trump win.

Q: Will that result in a crash?

A: Yes. At least 1,000 points in the overnight session following.

Q: Do you think it’s going to happen?

A: No. According to the polls, Trump will lose by at least 15 million votes. While the polls missed the Electoral College result last time, they were dead on with the popular vote, with Hillary Clinton winning by 3 million votes. If the margin were only a few hundred or thousand votes in a single battleground state, Trump might win a court fight. But he can’t win if the margin is in ten states and tens of millions of votes. That is too much to fudge. That is how markets react: they hate surprises, and a second Trump win would be the surprise of the century.

Q: With all of the earnings positive, do you think markets will stay positive?

A: Earnings aren’t important right now. Everyone knew earnings would be great because we were coming off of hundred-year lows caused by the pandemic. So yes, we knew they’d be up 50%, 100%, 150%; that's not the surprise. The bigger issue is what the pandemic is going to do, and of course, only biochemists know that—most stock traders have no idea, which is reflected in these gigantic swings we’re seeing in the market both on the upside and the downside. As a biochemist, I can tell you that this is our final wave that's coming up and it could last several months. After that, we get a vaccine or herd immunity. When it's done, you have the bull market of a lifetime—up 400% in ten years from these levels. Dow 120,000 here we come!

Q: Do you see a tax selloff if Biden gets in? Should we get short?

A: Definitely; there will be a tax selloff. Past ones have only lasted a week or two and those were the last two weeks of December, so it really won’t be that bad. It’s not like it’s a surprise that Biden is ahead in the polls, because he has been for 6 months. Nor is it a surprise that he is going to raise taxes on the wealthy. I wouldn’t get short though. The short play was last week and the week before; and I did manage to get out three shorts but didn't want to get too big in front of an election. So those all worked. I'm out of all of them now, and now we’re looking only at long plays. And with the Volatility Index (VIX) over $40, you can go 20% or 30% in-the-money on these call spreads and still look to make 10%-20% profit on the position in a month.

Q: Isn’t the pandemic great for Amazon (AMZN)?

A: Yes, Amazon was taking over the world anyway, and forcing everyone to an online-only economy which couldn’t be better for them. A lot of this shifting is permanent and won’t be going back to the way it was before the pandemic with brick and mortar shops and malls. So yes, we love Amazon and I would buy on the dips. There’s a double from here.

Q: Do you have long term names I can buy to sit on?

A: Yes, we actually do have a long-term portfolio posted on the website. It would be listed under your subscription area once you log in—we rebalance that twice a year. And of course, we had a 10% holding in Tesla (TSLA) which went up ten times, so the performance of the long-term portfolio is through the roof. To find the long-term portfolio, please click here.

Q: Do you record this webinar?

A: Yes, we post it on the www.madhedgefundtrader.com site in two hours.

Q: Do you still like the Internet security stocks like FireEye (FEYE)?

A: Yes. Hacking is growing faster than the Internet itself. You should also look at Palo Alto Networks (PANW) and the ETF (HACK).

Q: Should we hold on to the Visa (V) spread hoping it will come back after the election drop?

A: Hope is not an investment strategy. I always stop out of positions when they hit a 2% loss. The only time I have 4% losses is when we get these gigantic gap moves overnight, which tend to happen once every one or two years. In this case, Visa got hit with a surprise antitrust suit from the Department of Justice that knocked $10 off of the stock. So no, I will not hold on to it in the hope that it does better; I will try to minimize my losses, get out, and get into the next winning position. Hope is what turns a 4% loss into a complete 10% write off.

Q: What’s your view on the Canadian dollar (FXC)?

A: I like it, but it’s not as good as the Australian dollar (FXA) because Canada has a major oil exposure, and actually the worst kind of oil exposure—tar sands in northern Alberta. The outlook for oil is poor and that will be a drag on the currency in the form of fewer exports. Buy the (FXA). No oil troubles here. Kangaroos are another story.

Q: Will you be looking to sell short on the United States Treasury Bond Fund (TLT)?

A: Yes, if we can just get a little bit higher. We’re looking at an economic recovery next year, so we’d expect the (TLT) to be lower by at least $20 points in 2021.

Q: Do you think the San Francisco and New York housing markets will return to what they were before with so many people are moving out of the city?

A: Yes, they will come back, I’ve been through many of these cycles in San Francisco over the past 50 years; it always comes back. Once the pandemic is over, people will say, “Oh my gosh, I can’t believe you can get a two-bedroom apartment in San Francisco for only $2 million.” That's probably another year or two off after a vaccine is in widespread distribution.

Q: Is real estate in a bubble?

A: Absolutely, but real estate bubbles can go on for a long time, like ten years. The bubble in Australia has been going on for 30 years. Ultimately, real estate prices are driven by the earnings power of the local economy which, in the case of San Francisco, is huge. This time around, we have a record large millennial generation looking for real estate. There are 85 million millennia buyers with only 65 million Gen X-er’s selling homes. So, we have to make up a shortfall of 20 million houses at some point. That’s why building permits are through the roof every month.

Q: Zoom (ZM) and DocuSign (DOCU) are the darling stocks of COVID 2020—what do you think about them at these high prices?

A: Very high risk. If you bought these a year ago when we first started covering them, good for you as they're up ten times. However, there are better fish to fry than chasing these big pandemic winners at all-time highs.

Q: If Biden wins, what happens to defense stocks like Raytheon Technology (RTX)?

A: They go down. It turns out a lot of the defense business is in very long term contracts that can’t be broken. They have to supply so many planes a year to the government for a decade or more. However, the sentiment on these sectors sours under democratic administrations because they are not initiating new weapons systems where the big money is made. Lockheed Martin (LMT), Northrop Grumman (NOC), and General Dynamics (GD) all have the same problem. I grew up with these companies. They were the FANGs of their day.

Q: How does a Biden win affect Tesla (TSLA)?

A: Then $2,500 a share for Tesla looks cheap (it’s now at $410). Biden will do everything he can to slow climate change and accelerate alternative energy. Tesla is front and center on that. Under current law, car manufacturers are limited on the number of units they can sell to get the $7,500 tax break per vehicle. Tesla used up all their subsidies five years ago. My bet is that the limits will be eliminated and that leads to a huge surge in Tesla sales in the U.S., which is why the stock has gone up 10 times in the last year. Tesla has promised to drop their car price to $25,000 in three years. If you throw in $10,000 in federal and state tax subsidies you get the car for free. Then you can write off General Motors (GM) and Ford (F).

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Bear Sighting

October 30, 2020/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Mixed Messages

Diary, Newsletter, Research

It was definitely a week of mixed messages in the stock market.

Is Covid-19 going to disappear by itself shortly, or is it the worst thing since the black plague?

Are we going to get a $2 trillion stimulus package out of Washington, or not?

Are stocks too expensive, or still cheap?

We are being told the answers to these questions loud and clear, we just can’t hear them.

For this election looks to set all records on turnout. Every city in the country is seeing lines of voters snaking around the block waiting 2-8 hours. But which way are they voting? Are there hoards of hidden Biden voters coming out of the woodwork, or Trump ones? We won’t know the result for eight more days.

In the meantime, the markets bide their time.

Which raises one last question: how low can stocks fall over the next seven trading days?

In the meantime, some asset classes aren’t willing to sit on their hands any longer. Interest rates have started to rise, hitting a four-month high. This has knocked 15 points off of bond (TLT) prices. Yet, contrary to expectations, the US dollar is hugging a multiyear low (UUP), while commodity prices (FCX) soar.

All of this spell a record economic recovery in 2021. All that remains is for stock prices to play catch-up.

The word is that there is over $1 trillion sitting on the stock market ready to dive in the day after the election, possibly tacking on at least 10% to the major indexes by yearend. There could be one hell of a post-election celebration, no matter who wins.

Baby Boomers are unloading stocks to Gen Xers mostly, but Millennials as well. Of course, they have all the money, with a 53% ownership of all stocks, compared to 27% for Gen Xer’s and a mere 3% for Millennials. The Greatest Generation, born before 1946, have been shrinking their share ownership since 1990 and own only 17% of the total now. A coming jump in capital gains taxes will accelerate the process.

China’s Economy soared by 4.9%, in Q3 YOY with the pandemic in the rear-view mirror. First into the Coronavirus brings first out. Retail sales are through the roof and industrial production and business investment is accelerating.

Goldman Sachs says a Blue Wave will increase spending and boost the stock market. Total one-party control of the government eliminates the haggling that we are currently seeing in Washington and will deliver more Covid-19 aid faster. It should more than offset the ill effects of tax increases.

Beware of the coming Tax Loss Selling. A Biden win could unleash a torrent of selling as investors rush to beat an increase in the capital gains tax. That’s when you buy.

US Housing Permits blow the roof off at 1.553 million, up a staggering 22% YOY and a 13-year high. I wondered why I was suddenly getting a lot of flat tires on the freeway. They’re caused by nails and screws falling off the back up pickup trucks on the way to jobs. The long-term structural housing shortage continues. 30-year money at 2.75% makes a big difference.

Tesla generates a record profit for the fifth consecutive quarter in a row. The company is relying on its China factory to hit its 2020 target of 500,000 million units. Again, $397 million in regulatory credits drive earnings, payments from other carmakers who are lagging on electric car production. Gross margins rose 250 basis points to 23.5%. S&P 500 listing here we come! Next target $2,500!

Weekly Jobless Claims dropped to 787,000, better, but still horrible. California is finally reporting again.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Global Trading Dispatch hit a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips and a seller on bigger rallies. October has now reached to a welcome 1.89% profit.

That keeps our 2020 year-to-date performance at a blistering +36.29%, versus a LOSS of -0.57% for the Dow Average. That takes my eleven year average annualized performance back to +36.21%. My 11 year total return stood at new all-time high at +392.30%. My trailing one year return appreciated to +42.86%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 225,239, which you can find here.

On Monday, October 26 at 10:00 AM EST, New Home Sales are published. Ely Lilly (LLY) and Merck (MRK) report earnings.

On Tuesday, October 27 at 9:00 AM EST, the S&P Case Shiller Home Price Index for August is released. Microsoft (MSFT) and Pfizer (PFE) report earnings.

On Wednesday, October 28, at 2:00 PM EST, the EIA Cushing Crude Oil Stocks are out. Boeing (BA) and Visa (V) report earnings.

On Thursday, October 29 at 8:30 AM EST, the Weekly Jobless Claims are announced. At the same time, we get the first read on Q3 GDP. Alphabet (GOOGL) and Amazon (AMZN) report earnings.

On Friday, October 30, at 8:30 AM, Personal Income for September is printed. Exxon (XOM) reports earnings. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I’ll be charging up every electronic device I have as the San Francisco Bay Area is expected to suffer a complete power blackout for the next three days. PG&E is shutting off the juice because winds are expected to reach 70 miles per hour and it hasn’t raised in six months.

I won’t be affected because I am totally off the grid with my own solar and battery network. You can easily find me because mine will be the only house in the mountains with the lights on.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

October 26, 2020/by Mad Hedge Fund Trader

11 Surprises that Would Destroy This Market

Diary, Newsletter, Research

Note to readers: Sorry for the short letter today but PG&E is about to turn off my electric power to reduce the risk of a wildfire during these high, hot winds from the east so I’m sending you just a few quick thoughts.

The Teflon market is back.

Bad news is good news. Good news is good news.

What could be better than that?

However, there are a few issues out there lurking on the horizon that could pee on everyone’s parade.

Risks of an asymmetric outcome right now are huge. Let me call out the roster for you.

1) The China Trade War Escalates – Every day economic advisor Larry Kudlow tells us that the trade talks are progressing nicely, and every day the administration pulls the rug out from under him with new sanctions. The last chance to avoid the next recession is upon us. A trade deal is the rational thing to do. Oops! There's that “rational” word again.

2) Economic Data Gets Worse - After a great data run into the fall, they are suddenly rolling over. All of the forward-looking data is now 100% terrible.

3) The Fed Raises Interest Rates- This has been the world’s greatest guessing game for the past three years. Jay Powell has just promised NOT to raise interest rates for three years, so an increase would be completely out of the blue and have an outsize impact. The Fed lives in perpetual fear of the American economy going into the next recession with interest rates near zero! That would leave them powerless to do anything to engineer a revival.

3) Another Geopolitical Crisis - You could always get a surprise on the international front. But the lesson of this bull market is that traders and investors could care less about North Korea, ISIS, Al Qaida, Afghanistan, Iraq, Syria, Russia, the Ukraine, or the Chinese expansion in the South China Sea.

Every one of these black swans has been a buying opportunity of the first order, and they will continue to be so. At the end of the day, terrorists don’t impact American corporate earnings, nor do they own stocks.

4) A Recovery in Oil – The next drone attack against Saudi Arabia could send oil really flying. If it recovers too fast and rockets back to the $100 level, it could start to eat into stock prices, especially big energy-consuming ones, like transportation and industrials.

5) The End of US QE - The Fed’s $4.5 billion quantitative easing, relaunched in March, could end as soon as it gets the sense that the economy is recovering too fast. That would take the punch bowl away from the party. Anyone who said QE didn’t work obviously doesn’t own stocks.

6) A New War – If the US gets dragged into a major new ground war, in Iran, North Korea, Syria, Iraq, or elsewhere, you can kiss this bull market goodbye. Budget deficits would explode, the dollar would collapse, and there would be a massive exodus out of all risk assets, especially stocks.

7) US Corporate Earnings Collapse – They already have for the sectors of the economy where you can’t socially distance, like movie theaters, restaurants, and airlines. A much higher third wave of Covid-19 would do the trick nicely, bringing a new round of lockdowns. Do you think stocks (SPY) will notice?

8) Another Emerging Market (EEM) Crash - If the greenback resumes its long-term rise, another emerging market debt crisis is in the cards. Venezuela and Argentina are just the opening scenes.

When their local currencies collapse, it has the effect of doubling the principal balance of their loans and doubling the monthly payments, immediately.

This is the problem that is currently taking apart the Brazilian economy right now. It happened in 1998, and it looks like we are seeing a replay.

9) A Trump Victory – Since the stock market has spent the last six months discounting a Biden win, the opposite result would be a total out of the blue shock. Count on a 10% dive in the (SPY) immediately, and 20% eventually. Polls can be wrong. Who knew?

10) Inflation Returns – Steep tariff increases on everything Chinese is rapidly feeding into rising US consumer prices. What do you think the Amazon (AMZN) wage hike to $15 means? If McDonald’s (MCD), Walmart (WMT), and Target (TGT) join them, we’re there. This is a stock market preeminently NOT prepared for a return of inflation.

I know you already have trouble sleeping at night. The above should make your insomnia problem much worse.

Try a 10-mile hike with a heavy pack every night in the mountains. It works for me.

Down the Ambien, and full speed ahead!

A Threat to Your Portfolio?

October 23, 2020/by MHFTF

Why You Must Avoid all EV Plays Except Tesla

Diary, Newsletter, Research

Markets live on fads. Once a certain investment theme takes hold, the imitators start coming out of the woodwork in droves.

In 1989, all of the largest Japanese banks stampeded to issue naked short put options on the Nikkei Average by the billions of dollars when the index was at an all-time high. It then fell by 85%.

I remember signing the paperwork on a $3 billion deal for the Industrial Bank of Japan on behalf of Morgan Stanley. It’s been 31 years, but I’m still waiting for those investors to come after me.

Then there was the peak of the Dotcom Bubble in 2000 and no less that five online pet food delivery companies raised billions. (remember those cute sock puppets?) Every one of them went under.

So, what has been one of the biggest fads of 2020?

That would be electric vehicles.

You no longer have to wear Birkenstocks, grow your hair long, and smoke pot to drive an electric car. They are about to become a major part of the American economy. According to Adam Jonas at Morgan Stanley, EVs account for 1.3% of the total car market today and will grow to 10% by 2025 and 25% by 2030.

I have been involved in Tesla since its earliest days back in 2003. Then it was one rich man’s hobby, with technology that was a reach at best, and unlikely to ever see the light of day as a public company. There it remained for seven years.

Then they brought out the Model S in 2010, which I snapped up as fast as I could, picking up chassis no. 125 at the Fremont factory. My signature is still on the wall there. If it worked this had the potential to be a real car. If it didn’t, I would wind up with $100,000 worth of inert aluminum, steel, silicon, rubber, and copper.

The trials were then only just beginning for Musk. He faced nervous breakdowns, sleeping in factories, and SEC prosecutions. After a decade of abuse, suddenly everything clicked. Total Tesla production soared to over one million units and the shares leaped 150-fold to $500 from their post IPO low of $3.30. That move financed a lot of retirements among my readers.

I remember what Steve Jobs once told me; “Like many overnight successes, this one took decades to pull off.”

Suddenly, making electric cars looked easy. Raising money to finance them looked even easier.

Enter the hoards, which I list below, a roll call of the shameless:

Nikola Badger – Roll out is expected in 2021 and has a hydrogen fuel cell power source that hasn’t a hope in hell of ever becoming economic. As I never tire of explaining to investors, while electric power is digital and scalable, hydrogen is analog and isn’t. Maybe that’s why the stock is down 83% since June. Too many unbelievable promises and no actual functioning model. Gravity was their only actual power source.

Fisker – If at first, you don’t succeed, why not fail again? This had double the number of parts of a conventional international combustion engine. Its chief claim to fame was that it got a free factory from the government in Joe Biden’s home state and the fact that Justin Bieber drives one. More flailing at the wind.

Aspark Owl – A $3.2 niche supercar with appeal to maybe three car collecting Saudi princes.

Bollinger B1 – Is a $125,000 SUV expected from a Michigan startup with only a 200-mile range. Why not pay nearly double the cost of a Tesla Model X and get half the performance?

The Byton M-Byte – Is a $45,000 crossover car from a Chinese start up. China has actually been building electric cars longer than Tesla, but they have a tendency to breakdown or catch on fire. Quality and safety problems have until now kept them out of the US, and probably always will.

Genesis Essentia – A Croatian-based startup with a major investment from South Korea’s Hyundai. It will most likely never get off the drawing board. The last time Croatia built cars was for the Austria Hungarian Empire during WWI.

Rivian R1T – A startup with a reasonably priced truck and up to 400 miles of range that will only make it because they have a 100,000-unit order from the largest shareholder, Amazon (AMZ). It’s perfect for local deliveries.

By now, virtually every major car manufacturer has or is about to roll out its own entry in the electric car race. I list them below, skipping those that are more than two years out over the horizon. Notice the profusion of the letter “e” in the names.

They include the Porsche Taycan, Audi eTron, Jaguar I-Pace, Austin Mini Electric, Fiat 500e, Kia Niro EV, BMW i3, Chevy Bolt EV, Hyundai Kona Electric, and the Hyundai Ioniq Electric, Ford F-150 Electric, Ford Mustang Mach-E, and Nissan Ariya.

Not one of these comes even close to the price/performance and battery density of the Tesla cars. Tesla is a decade ahead of the competition and is accelerating its lead. At best, they will sell a few electric cars to those who are intensely loyal to their brands and lose money doing it.

In the meantime, Tesla hasn’t been sitting on its hands. Elon Musk plans to bring out a $25,000 model in two years that will bar entry to the field any other competitor. It is bringing out its own $250,000 supercar, the Tesla Plaid, which will go zero to 60 MPH in 1.9 seconds and have a 600-mile range. The Tesla Cyber Truck at $40,000 has the specs to take on the enormous US pickup market. Did I mention that the company is on the verge of developing technology that will improve battery performance by a staggering 20-fold?

So Tesla is branching out to suck up every profit in every branch of the entire global auto industry.

And this is what most traders, especially the short sellers, got wrong about Tesla. The data is worth more than the car. The miles driven provide a springboard from which the company can offer very high value-added and profitable services, like autonomous driving. Not even Alphabet (GOOGL) can replicate this.

When I bought my first Tesla more than a decade ago, I knew I was betting on the company. The big risk was that General Motors (GM) would step in with their own cheap electric car and drive Tesla out of business.

In the end (GM) did that, but too little, too late. It’s Chevy Bolt EV didn’t hit the market until the end of 2016. Today, it offers a boring design, lacks autonomous driving, possesses only a 259-mile range for $36,620, and is subject to recall, thanks to recurring battery fires (click here for the link).

The quality is, well, Chevy quality.

This year, Chevy will sell under 20,000 Bolts. Tesla is approaching 500,000. It’s too late to close the barn door after the horse has “bolted,” as GM is earning. Over the past decade, Tesla shares are up 150 times. GM shares are nearly unchanged during the greatest bull market of all times.

It is competing against Teslas that are 20 years from the future, are fully autonomous, goes to street-to -treet autonomous driving next year, and upgrades itself once or twice a month.

Make mine Tesla, please, which will soon become the world’s first trillion dollar car company. Don’t waste your time or money on the others, either as a driver or investor.

October 21, 2020/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Why the Next Two Weeks are a Write-Off

Diary, Newsletter, Research

You can pretty much write off trading for the next two weeks.

The election has been decided. It’s going to be a scandal a day in the media, but everyone has already made up their minds. All attention will be devoted to politics at the expense of trading, investment, and research. In the end, the president will lose by more than 15 million votes. All that is left but the imprimatur of the Electoral College.

Yet the Democrats are not declaring victory, with the memory of the 2016 debacle too fresh, when overconfidence and complacency ruled.

The few who are trading are jockeying around to position for the 2021 market. That means keeping big tech and adding to positions in domestic recovery and industrial stocks, like banks, couriers, railroads, and drug companies.

Tech will keep rising because of the catapult into the future provided by the pandemic yet to be reflected by share prices. Domestic industrials will see a recovery that is normal when coming out of a tradition recession, or Great Depression.

But they are doing so hesitantly, with little conviction.

After all, there are national elections in two weeks.

As for me, I have limited myself to the cautious two positions, one long in Visa (V) and one short in the S&P 500 (SPY), both of which are making money.

So, it is a good time to do your research, build your short lists of stocks to buy, and gird your loins. The main event begins after November 3.

Markets jumped on stimulus hopes. Investors don’t really care if stimulus happens before or after a Biden win. They’re buying now. And Biden will almost certainly double up spending later in the year. No dips for latecomers. The post-election market melt-up has begun and new highs beckon. Fears of election disruption have vaporized.

Markets just entered the strongest six months of the year. It’s the inverse of sell in May and go away. October to May portfolios have yielded 64% annually for the past 20 years, while May to October investments yield exactly 4%. It traces back to America’s agricultural cycle of a century ago. Take every tailwind you can find.

The IMF predicted negative 4.4% growth for 2020, the worst since the Great Depression. Believe it or not, this is an upgrade from more dismal numbers. By comparison, the 2008-09 Great Recession brought only a 0.1% drawdown. If the US passes another stimulus package, it will recover its 2019 GDP in 2021 instead of 2022.

The new 5G iPhone is out! After a year of speculation, we get a better screen, improved camera, and magnetic charging for $999. The stock dumped on a classic “buy the rumor, sell the news.” Also out is a new mini iPhone for $699. Your neighborhood won’t have 5G for a year. Buy Apple (AAPL) on dips.

The US PC market saw best quarter in a decade, with millions of new home offices joining the fray. Some 71.4 million computers were shipped in Q3, up 3.6% YOY. Think enormous demand for new chips. Buy (AMD), (MU), and (NVDA) on dips.

Used car prices are soaring, jumping the most since 1969, and lifted the Consumer Price Index by 0.2% in September. It’s the fourth straight month of increasing inflation.

Ships are backed up in Los Angeles waiting to unload. America’s import boom and soaring trade deficit with China leaves no available dock space on the west coast. It’s another sign of a recovering economy.

US Producer Prices pop in September bringing the first YOY gain since March. They were up 0.4% following a 0.3% gain in August. Another sign of a recovering economy.

Weekly Jobless Claims ballooned to 898,000, now that California is reporting again. Not what you want to see going into an election. A slowing economy and spreading virus don’t help either. Some 25.5 million Americans are out of work.

That keeps our 2020 year-to-date performance at a blistering +36.11%, versus a gain of 0.3% for the Dow Average. That takes my eleven-year average annualized performance back to +36.13%. My 11-year total return stood at a new all-time high at +392.02%. My trailing one-year return appreciated to +42.67%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 219,679, which you can find here.

On Monday, October 19 at 8:30 AM EST, the IMF/World Bank virtual annual meeting starts, so we can expect Fed speakers every day. (IBM) reports earnings.

On Tuesday, October 20 at 8:30 AM EST, Housing Starts for September are announced. Netflix (NFLX) reports earnings.

On Wednesday, October 21 at 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out. At 2:00 PM EST, the Fed Beige Book is published, a transcript of the Federal Open Market Committee meeting from six weeks ago. Tesla (TSLA) reports earnings.
change.

On Thursday, October 22 at 8:30 AM EST, the Weekly Jobless Claims are announced. At 10:00 AM EST Existing Home Sales for September are out. AT&T (T) reports.

On Friday, October 23, at 2:00 PM, we learn the Baker-Hughes Rig Count. American Express (AXP) reports earnings.

As for me, I saw a curious thing driving back from Lake Tahoe this weekend. Usually, I see a never-ending parade of out of state license plates moving to the Golden State.

This time, I saw telephone poles coming in by the truckloads, hundreds of them. These are to replace the many burned down in the horrific wildfires that incinerated an area the size of Connecticut. Apparently, California has run out of telephone poles.

Is there a public stock for a company that sells telephone poles?

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

October 19, 2020/by Mad Hedge Fund Trader

October 14 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the October 14 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think Interactive Brokers (IB) will give better executions?

A: No, these executions are all done by identical computers with identical programs now, across eleven differences of electronic exchanges. It’s like trying to decide whether to buy Exxon or Mobile gas. It’s all the same stuff. The only real difference in brokers these days is in customer service; and you really have to shop around there and find what you like. Even on customer service, most brokers have cut back staff to a minimum. In the end, the only difference among brokers may be “hold” times.

Q: What are your thoughts on Xpeng, Inc. (XPEV), the Chinese electric car manufacturer?

A: The Chinese have actually had electric cars longer than Tesla (TSLA) has and I have visited their factories in China, like BYD Auto (https://en.wikipedia.org/wiki/BYD_Auto). The problem has always been quality—the batteries tend to catch on fire, the cars fall apart—and that’s why they have never exported an electric car to the U.S. I don't expect that to change. What’s more likely is Tesla building more factories in China, where they overwhelmingly have the technology, brand, and quality lead. I don't think any electric car company can threaten Tesla now that they’re so far ahead.

Q: Is it a good time to buy the iPath S&P 500 VIX Short Term Futures ETN (VXX)?

A: No, because you only make money on the (VXX) when you get a volatility increase almost immediately after you buy it. So, if you have some great insight on the next volatility explosion, try it; otherwise, the time decay will kill you. By the way, everyone knows there is going to be a presidential election in three weeks so it’s already in the price.

Q: What is the likelihood of a financial transaction tax, and how would it affect our trading?

A: It wouldn't hurt our trading, because we’re mostly small fry. It would wipe out high-frequency trading where they’re trading for a penny with no transaction costs. And that, in fact, would be the goal: to wipe out high-frequency trading. Unfortunately, they’re about 80% of the market now, so I’m not sure who would step in and fill in that space. But there’s always someone.

Q: What about Moderna (MRNA)?

A: Yes, I like it for the long term. I think next year will be another golden age for biotech, and they have had a great rally so I’d be looking to buy on dips. MRNA is certainly going to participate. After Corona, there are 100 other diseases they could be working on. It’s not a COVID-19-only story, which is what some of the short sellers got wrong.

Q: How far does Gold (GLD) go down before it goes up?

A: Probably not much more; we have had a decent 10% correction. I was actually thinking about buying gold today, but I also hate leaning into a downtrend. So, any downtrends are temporary, we're looking at new highs in gold next year. This is a QE (quantitative easing) trade, not a risk-off trade like it used to be. So, the continuation of QE for years means that gold goes higher.

Q: When is it time to trade bonds (TLT) again?

A: Bonds just had their narrowest trading range in years in the last month. We only want to play on the short side; it broke down last week so we don't want to do anything here.

Q: Is a 1% drop in Advanced Micro Devices (AMD) a dip?

A: No, a 10% drop in AMD is a dip. Buying a 1% drop is a chase, which is an invitation to a lot of pain.

Q: Have SPACs (Special Purpose Acquisition Corporation) replaced IPOs?

A: I think SPACs are one of the greatest scams of all time. Everybody will get ripped off after paying enormous fees, and once these things go illiquid, no one will be able to get out, so I would not chase the SPAC game. They are only created to dodge the investor protections in the IPO process, I've seen too many of these fads happen over the last 50 years. They always end in tears.

Q: I think there will be another surprise Trump win similar to 2016. How would the market react to a Trump win?

A: It would crash because the market has built in a Biden win and chased up Biden sectors. So, if that doesn’t happen, the market has to give up all those gains and reorient itself. Trump had a 2-3-point polling deficit last time, and now he has to overcome a 17-point deficit or whatever the number is depending on the poll you look at. So, I don’t think so. Remember, Trump only won the election by 78,000 votes in three states. The 220,000 who have died from the pandemic are definitely NOT voting for Trump, nor are their 10X family members. That’s 2.2 million votes lost. Remember, the Corona death rate in red states is far higher than in blue states.

Q: Do you think a Bollinger Band squeeze is forming in Tesla right now?

A: Yes, even though this stock has had a prolific run, it looks like it wants to go higher. I wouldn’t go short.

Q: What about over issuance of US debt?

A: Any concerns about over issuance of debt won’t hit for a while because the Fed is going to keep the short-term rates at zero, which will anchor everything else at low levels. The initial heat will be felt in the ten- and 30-year bonds where you should be permanently short.

Q: Reminder that 4 years ago, you said a Trump win would crash the market.

A: Yes, I did say that, and it did crash the market—it dropped 1,000 points overnight and made it all back the next morning. I spent that entire night rebuilding portfolios which then had a massive run, so I remember that very well. That is the only election I was wrong on in 50 years. So, the lesson is don’t bet against the guy who's only wrong once in 50 years and count on him being wrong again. There are hundreds of data points now which show that Trump has no chance of winning and he’s acting in a way that backs that up.

Q: Is there a second COVID wave priced in yet?

A: No, the way these things work is scientists predict waves, traders say no it will never happen, then it happens and the traders puke out. And if that happens, we will know that is the buying opportunity of the century because that is exactly what we got on the last puke out in March. And yes, I was wrong; I said the stocks would double in two years and instead they doubled in three months.

Q: Do you think a real estate bubble is forming?

A: Yes, but it may not pop for another 10 years because we have 85 million millennials trying to buy housing right now, with interest rates near zero. I just refinanced my home at 2.75%. And only 65 million Gen Xers have homes to sell them, which is being expressed in higher home prices. That’s why I love the homebuilders (ITB).

Q: What about ProShares Ultra Short S&P 500 2X bear ETF (SDS)?

A: I would bail on that because the long-term trend is still up. Dow 120,000 here we come! You only want to use the (SDS) on short term dips, and then come out at the bottom.

Good Luck and Stay Healthy

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

October 15, 2020/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Back to the Nifty Fifty

Diary, Newsletter, Research

My daughter needed a desk so she could go to high school from her bedroom. So, I drove around Northern Nevada to get the perfect piece, visiting Reno, Sparks, Carson City, and Minden. It is one of the most conservative parts of the country, probably 90% republican.

What I saw was amazing.

There were Biden/Harris signs everywhere. Yes, there will still some Trump signs, but they were in a definite minority. Four years ago, you only saw Trump signs. The rare Clinton/Kaine sign was full of bullet holes, torn down, or copiously marked with offensive graffiti.

I thought, hmm, there must be a trade here.

We seem to be on the verge of massive changes in the US economy. Get in front of them and you’ll make a fortune. Lag behind, and you’ll be seen driving an Uber cab.

Technology undoubtedly led the decade, bringing in a 30% annual return since 2009. Industrial and other domestic stocks brought in no more than 12%. The “Roaring Twenties” could bring the reverse.

Technology will continue to do OK. Ever falling prices and greater service is a tough business model to beat. But let’s face it, none of these things are cheap. Apple (AAPL) going from a 9X multiple to 45X?

Industrials could be playing a massive catch up game initiating a new supercycle as they did from 2000-2010 when tech lagged in the wake of the Dotcom Bust.

This switch is made easier by the fact that most big industrial companies are now de facto technology ones. They all now use advanced cloud software, sophisticated robots, and state of the art distribution systems. Caterpillar (CAT) even has a 290-ton dump truck that drives itself like a giant Tesla (TSLA)!

Many of these companies I have covered for nearly 50 years, when they last belonged to the Nifty Fifty. So, for me, it’s a matter of dusting off my old research, seeing who is left, and giving them a modern spin. The great thing about these stocks is that many pay decent dividends.

I’ll give you a short list of where to buy the dips.

Banks – JP Morgan (JPM), Bank of America (BAC)
Railroads – Norfolk Southern (NSC), Union Pacific (UNP)
Credit Cards – Visa (V), Master Card (MA)
Couriers – FedEx (FDX), UPS (UPS)
Consumer Discretionary – International Paper (IP)

Hmm, a market where everything goes up. I like it! Dow 120,000 here we come!

Trump ordered all Stimulus Negotiations to cease, and then changed his mind six hours later. Clearly, the president has given up on the election and wants the next administration to inherit a Great Depression. Or is this Covid-19 talking? It’s the perfect scorched earth strategy. Write off another 2 million small businesses. Down ticket republican candidates will be beaten like a red-headed stepchild. Stocks plunged 600, with airlines in free fall, then bounced 700.

Jay Powell REALLY wants a stimulus package, claiming the economy desperately needs fiscal help to maintain a recovery or face a prolonged depression. “The risks of overdoing it seem, for now, to be small,” the central bank chief told the National Association for Business Economics. Are his pleas falling on deaf ears in Washington? Trump just gave our Fed governor the middle finger salute.

Share Buybacks vaporized T\this year and will be miniscule next year, with companies whose earnings have been crushed by the pandemic not participating. The ban on bank share buybacks imposed by the Fed continues. This has been the largest portion of net stock buying for the past decade. The good news is that foreign investors stepped in as big buyers in 2020, taking the indexes to new highs.

Apple to announce new 5G iPhone this week. The release came a month late, thanks to the pandemic. Scheduled for October 13, the event is called “High Speed”. Apple’s biggest sales quarter in history has just begun. Buy dips in (AAPL).

The Election is Noise and its best to focus on the bull market that has just begun, says JP Morgan. Record fiscal stimulus and quantitative easing in the face of near-zero interest rates create a perfect storm in favor of equities. The best stock to own going into the October 13 Prime Day?

Weekly Jobless Claims edged down to 840,000, still missing 200,000 from California, due to an upgrading computer system. California stopped reporting data so they can rebuild the antiquated computer system of the Employment Development Department, which has been breaking down due to overwhelming demand. Some 26.5 million workers are now claiming unemployment benefits.

Banks are making record trading profits on the back of the US Treasury market where volume has exploded. Even though there has been little net movement in prices in six months, the two-way bets have been enormous. It helps to have a massive home refi boom, incredible QE, and a government that is printing new debt like there’s no tomorrow.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

My Global Trading Dispatch maintained a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips.

That keeps our 2020 year-to-date performance at a blistering +35.46%, versus a gain of 0.5% for the Dow Average. That takes my eleven-year average annualized performance back to +36.14%. My 11-year total return stood at new all-time high of +391.37%. My trailing one-year return dropped to +44.26%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 210,000, which you can find here.

On Monday, October 12 at 8:30 AM EST, the government is closed for Columbus Day so there will be no data releases, even though the stock market is open.

On Tuesday, October 13 at 9:00 AM EST, the US Inflation Rate for September is out.

On Wednesday, October 14, at 8:30 AM EST, The Producer Price Index for September is released. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.

On Thursday, October 15 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get the Empire State Manufacturing Index.

On Friday, October 16, at 8:30 AM EST, US Retail Sales are printed. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I eventually found the perfect desk on Craigslist Reno. It was from the 1930s and had once occupied the office of the Metropolitan Life Insurance Company of New York, complete with two inkwells.

The company logo was prominently displayed in its wrought iron legs. When the Metropolitan modernized its offices in the 1950s, it sold off its furniture, which has been in circulation in the antique market ever since.

I told the seller, who had just moved from the east coast, of my amazing connection with the company. My Uncle Ed spent three years on a Navy destroyer in the Pacific during WWII. Enlistees in the 1940s were required to take out life insurance policies before they went off to war.

When Ed passed away a few years ago, I went through his papers and what did I find but a life policy from the Metropolitan Life Insurance Company for $1,000.

Ever the history buff, I called the company to find out if the policy was worth anything 70 years later. It turned out to have a cash value of $100,000, which they paid out immediately. I divided the money among my mom’s 20 grandchildren to pay for their college educations. Several now have PhDs. Got to love that compounding of interest.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Bring on the Roaring Twenties

October 12, 2020/by Mad Hedge Fund Trader

If Bonds Can’t Go Down, Stocks Can’t Either

Diary, Newsletter, Research

The U.S. Treasury bond market has suddenly ground to a halt, puzzling traders, investors, and hedge fund managers alike.

Today, the yield on the 10-year Treasury bond (TLT), (TBT) traded as low as 0.77%.

This is despite the U.S. economy delivering a horrific negative GDP growth during Q2. Growth is expected to rebound to 2-5% in Q3, depending on if there is another stimulus package from Washington, or not. 2021 could bring economic growth as high as an astronomical 10%.

If I blindfolded any professional money manager, told him the above and asked him where the 10-year Treasury yield should be, most would come in at around the 5% level.

So what gives?

I have put a great deal of thought into this and the answer can be distilled down to two letters: QE.

Global quantitative easing has created about $30 trillion in new money over the past 10 years. It has not been spent, it hasn’t disappeared, nor has it gone to money heaven. It is still around.

The U.S. Federal Reserve, the first to start QE in November 2008 during the Great Recession, ended it in October 2014. From start to finish, it created $4.5 trillion in new money. Over the past five years was wound down to $3.8 trillion by letting debt on its balance sheet mature.

Enter the pandemic. The expectation is that the new round of QE could exceed another $10 trillion or more.

Japan actually began its QE program in 2001, long before anyone else, to deal with the aftermath of the 1990 Japanese stock market crash and a massive demographic headwind (they’re not making Japanese anymore).

Some 20 years later, the Japanese government now owns virtually all of the debt in the country. When you hear about Japan’s prodigious 240% debt to GDP ratio, it’s all nonsense. Net out government holdings and there is no national debt in Japan at all. That’s why the Japanese yen is consistently strong.

After the 2008 crash, the Japanese government expended its QE to include equities as well. As a result, the government is now the largest single buyer of stocks in the Land of the Rising Sun. The Nikkei Average has risen by 234% since the 2009 bottom despite a miserable economic performance, and the yield on 10-year JGBs stand at a lowly 0.03%.

The European Central Bank got into the QE game very late, not until 2015, and its program continues anew, although at half its peak rate. The ECB has just renewed its plan to print a ton of new money.

Part of the problem is that the ECB is running out of bonds to buy, as it already owns most of the paper issued by European entities. That’s why 10-year German bunds are yielding a paltry -0.50%.

As a result, there is excess liquidity everywhere and this has broad implications for your investment or retirement portfolio. It could take as long as a decade before all of this artificial cash is removed from the global financial system.

For a start, bonds may not fall much from here, even if the Fed continues its near-zero interest rate policy for three more years, as promised.

Stocks can’t fall either with this much cash underpinning the market, at least not for a while and not by much. While company share buybacks have virtually disappeared this year, foreign investors have stepped in to pick up the slack.

It also means you can’t have a global contagion leading to a financial crisis. There is ample money available to refinance your way out of any problem when 70% of the world’s debt is still yielding close to zero.

The bottom line here is that global excess liquidity can cover up a multitude of sins. It means the price of everything has to go up, or at least stay level until that liquidity runs out. That includes stocks, bonds, your home, classic cars, and even that rare coin collection of yours gathering dust in a safe deposit box somewhere.

Yes, when the excess free cash runs out in a decade, there will be hell to pay. Until then, make hay while the sun shines.

Hay

October 8, 2020/by MHFTR

September 30 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the September 30 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Which is a better buy, NVIDIA (NVDA) or Advanced Micro Devices (AMD)?

A: NVIDIA is clearly the larger, stronger company in the semiconductor area, but AMD has more growth ahead of it. You’re not going to get a ten-bagger from NVIDIA from here, but you might get one from Advanced Micro Devices, especially if a global chip shortage develops once we’re out the other side of the pandemic. So, I vote for (AMD), and did a lot of research on that company last week. You can find the report at www.madhedgefundtrader.com but you have to be logged in to see it.

Q: Do you have any thoughts on the JP Morgan Chase Bank (JPM) spoofing cases, where they had to pay about a billion in fines? Is this a terrible time to invest in banks?

A: No, this is a great time to invest in banks because this is the friendly administration to banks now; the next one will be less than friendly. On the other hand, an awful lot of bad news is already in the price; buying these companies at book value or discount of book like JP Morgan, it's a once in a lifetime opportunity. All the bad behavior they’re being fined on now happened many years ago. So yes, I still like banks, but you really have to be careful to buy them on the dip, just in case they stay in a range. If you stay in a range, you’re buying them call spread, you always make money. The bigger drag on share prices will be the Fed ban on bank share buybacks but that may end after Q4.

Q: Is it time to buy Disney (DIS) after they laid off 28,000?

A: This is a company that practically every fund manager in the company wants to have in their portfolio. However, it could be at least a year before they get back to normal capacity in the theme parks, meaning customers packing in shoulder-to-shoulder. So, it could be another wait-for-a-turnaround, buy-on-the dip situation for sure. This company is so well managed that you’re always going to have to pay up to get into the Mouse House. By the way, my dad did business with Disney during the 1950s so we got Disneyland opening day tickets and I got to shake Walt Disney’s hand.

Q: How desperate is General Motors (GM) in buying the fake Tesla (TSLA) company, Nikola (NKLA), who've been exposed as giant frauds? Is GM hopeless?

A: Yes, the future is happening too fast for a giant bureaucracy like General Motors to get ahead of the curve. The fact that they’re trying to buy in outside technologies shows how weak their position is, and of course, it’s a great way to get stuck with a loser, as Tesla selling out to anyone. The Detroit companies are all stuck with these multibillion-dollar engine factories so they can’t afford to go electric even if they wanted to. So, I expect all the major Detroit car companies to go under in the next 5 years or so. Electric cars are already beating conventional internal combustion engines on a lifetime cost basis and will soon be beating them, within 3 years, on an up-front cost basis as well.

Q: Will Netflix (NFLX) pass $600 before the year's end?

A: I’m expecting a monster after-election rally to new all-time highs in the market and Netflix will be one of the leaders, so easy to tack on another hundred bucks to Netflix. That’s one of my targets for a call spread if we can get in at a lower price. And if you really want to be conservative, buy 2-year LEAPS, two-year call options spreads on Netflix, and you’ll get an easy 100% return on those.

Q: Who will win, Trump or Biden?

A: Neither. You will win. I am not a member of any political party as I would never join any club that would stoop to have me as a member. Groucho Marx told me that just before he died in the early 70s. Don’t ask me, ask the polls. Suffice it to say that the London betting polls are 60%-40% in favor of Biden, having just added another 5% for Biden after the debate. My expectation is that Biden picks up another point in the opinion polls in all the battleground states this weekend. So, Biden will be up anywhere from 6-10% in the 6 states that really count.

Q: What will the market impact be?

A: It makes no difference who wins. The mere fact that the election is out of the way is worth a 10% move up in the stock market.

Q: Should we keep the January 2022 (TLT) 140/143 bear put spread?

A: Absolutely, yes. That’ll be a chip shot and we in fact should go in the money on those number sometime next year. A huge cyclical recovery will create an enormous demand for funds and crowding out by the government will crush the bond market.

Q: Do you think it would be better to wait a week or two to lock in refis on home loans?

A: I think we are at the low in interest rates in the refi market. Even if the Fed lowers interest rates, banks aren’t going to lower their lending rates anymore because there's no money in it for them. It’s also taking anywhere from 2-4 months to close on a loan, as the backlogs are so enormous. If you can even get a loan officer to return a phone call, you’re lucky. So, I wouldn't be too fancy here trying to pick absolute bottoms; I would just refi now and whatever you get is going to be close to a century low.

Q: Why so few trade alerts?

A: Well, very simple. We only do trade alerts when we see really good sweet spots in the market. There aren’t sweet spots in the market every day; you’re lucky if you get 1 or 2 in a month. Then we tend to pour in and out of the market very quickly with a lot of alerts. There is no law that says you have to have a position every day of the year. That buys the broker’s yacht, not yours. You should only have positions when the risk reward is overwhelmingly in your favor. That is not now when our market timing index is hugging the 50 level. At 50, you actually have the worst possible entry point for new trades, long or short, so I’d rather wait for it to get away from that level before we get aggressive again. We have gone 100% invested multiple times in the last two months and made a ton of money. So, you just have to wait for your turn to get a sweet spot, and then you’ll make a very quick 10% or 15% in the market. Patience is rewarded in this business.

Q: Would you wait for the election because of the high implied volatility?

A: No, I would not wait. The game is to get in at the lowest price before the election. When the implied volatilities drop after the election, the profits you can make on these deep out of the money LEAPs drop by about half. Thank the volatility while it’s here because it’s creating great trading opportunities now, not in two months after the volatility Index (VIX) has collapsed.

Q: What about Zoom (ZM)?

A: As much as Zoom has had a 10-fold return since we recommended it a year ago, it looks like it wants to go higher. The Robinhood traders just love this stock; it’s a stay at home stock, stay at home is lasting a lot longer than anyone thought. Zoom is just coining it on that.

Q: Is the best outcome a Biden presidency and a Republican Senate?

A: No, that is the worst outcome. When you have a global pandemic going on, you don’t want gridlock in Washington. You want a very active Washington, controlled by a single party that can get things done very quickly. That is not now, which is possibly a major reason that we have the highest Covid-19 death rate in the world. It’s because Washington is doing absolutely nothing to stop the virus; the president won’t even wear a mask, so yes, you need one party to control everything so they can push stuff through. If it works, great, and if not then you kick them out of office next time and let the other guys have a try.

Q: Will property markets be up 20% by the end of the year?

A: If you live in a suburb of New York or San Francisco, then yes it will be up that much. For the whole rest of the country, the average is more like 5% gains year on year. In the burbs of these big money-making cities, prices are going absolutely nuts. My neighbor put his house up and it sold in a week for a $1 million over asking. So, the answer to that is yes, hell yes.

Q: Can you explain why the IPO market is suddenly booming now?

A: A lot of these companies like Palantir (PLTR) have been in development for 20 years, and prices are high. On valuation terms, we are at dot com bubble peaks now. That is the very best time to take your company public and get a huge premium for your stock. When the world is baying for paper assets, you print more of them.

Q: What is the best way to play real estate?

A: Buying the single home building companies like Pulte Homes (PHM), Lennar Homes (LEN), and KB Homes (KBH).

Q: What is your Tesla overview in China?

A: Tesla’s already announced that they’re doubling production of the Shanghai factory, from 250,000 units a year to 500,000. They built the last one in 18 months. It would take (GM) like 5 years to build something like that.

Q: Why has gold (GLD) lost its risk-off status?

A: It’s now a quantitative easing asset—like tech stocks, like bitcoin, and the stay at home stocks. It is being driven much more by QE-driven speculators flush with free cash than anyone looking for a flight to safety bid. When this group sells off, gold drops as well. The only risk-off asset right now is cash. That is the only “no risk” trade.

Q: What does reversal in lumber prices tell you?

A: Lumber was another one of those QE assets—it tripled. But you have this monster increase in new home building, huge demand for new homes in the suburbs, huge import duties leveled by the Trump administration on lumber coming from Canada. Also, a lot of people are getting COVID-19 in the lumber mills. So, they’re having huge problems on the production side in lumber, as a result of the pandemic.

Q: Are there any alternative ways to buy the Australian dollar besides (FXA)?

A: You go into the futures market and buy the Australian dollar futures. That is an entirely new regulatory regime so can be a huge headache. It requires you to register with the Commodities Futures Trading Commission, which is the worst of all the major regulators, but that is an alternative. If you’re an individual and not regulated instead of being a professional money manager, then it’s much easier.

Good Luck and Stay Healthy

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader